Wednesday, February 27, 2013

US Unemployment Graph, 1869–1899

The following graph shows the unemployment rate in the US from 1869 to 1899 (Blogger has cut off the right edge, but the graph data is still clear). The estimates are taken from Vernon (1994), although other estimates for the 1890s put unemployment at higher levels.

The blue line at 4% is the upper limit of full employment, which is usually defined as less than 1% up to 4%. Rarely did unemployment fall below 4% in the late 19th century.

Of especial interest is the spike in unemployment from 1875–1878, for the real GNP estimates of Balke and Gordon show positive GNP growth rates in these years.

What went wrong with the US economy?

One possibility is that the real GNP estimates of Balke and Gordon are wrong.

Certainly, the relevant data from Davis’s US industrial output index show an industrial recession from 1873 to 1875:

This data is presented below in graph form. You can see the manufacturing recession and subsequent stagnation.

From 1873, industrial output fell, mildly in 1874, but sharply in 1875. Davis (2004: 1203) finds that the cumulative industrial index loss (-10.83) was the second worst of the late 19th century, and only surpassed by the double dip recession of the 1890s.

By the 1870s the industrial sector of the US economy was large enough to be a good index of real GDP movements, and Davis finds that the US had a recession from 1873 to 1875 lasting less than 3 years.

A brief recovery in industrial output happened in 1876, but there was stagnation in 1877.

So, all in all, the rising unemployment until 1878 looks like the result of a severe recession from 1873 to 1875, poor recovery, and then stagnation in 1877 (perhaps a double dip recession in the mid to late 1870s is another possibility).

For one thing for a book that covers so much material, it is so brief and one sided.

And I love their nonsense here:

"The fact that the laborer depends on his wages for sustenance is irrelevant, since all sellers of commodities use their income to obtain life’s necessities" p. 383.

If this is supposed to mean (as I suspect it does) that capitalists spend their income only either on consumption or capital goods investments, it's rubbish.

On p., 383 they confuse the theory of value with the theory of price. Contrary to what they say, Keen's cost of production theory of prices is consistent with recognisingthat people derive subjective utility (satisfaction) when consuming goods.

The conclusion might be that some modern estimates of real GDP (Balke and Gordon) may not necessarily be reliable. Yet Rothbard tried to use GDP to declare the 1870s some kind of record period of prosperity.

Same thing happened 1893. Railroad boom, extension of credit. There can never be a depression without a preceding boom of credit expansion. There would never be a run on banks if a 100% reserve were adhered to at all times. The worst that would happen is depositors simply pick up their deposits. People are not stupid. They know how banks are allowed to operate and they vie to be the first in line so that get their part of the banks partial reserve returned to them.

(1) that a speculative boom occurred before 1873 is true. That the ABCT is the correct explanation of the business cycle does not follow at all. Keynesian explanations are just as good.

Anyway, this type of asset price bubble boom is most decidedly not explained by the classic ABCT (which fails to consider the destabilising role of asset price inflation). Minsky's FIH is clearly a superior theory.

(2) FR banking is not inherently fraud. Capitalism is stuck with FRB. So what you're saying (by your own logic) is that capitalism is flawed.

In reality, the solution for stability is central bank, financial regulation and countercyclical fiscal and monetary policy.

(3) you do not even need a prior boom in credit to have a trade cycle: pre-modern economies can be driven by cycles caused by fluctuations in agricultural output.

Even subjective expectations of investors per se is a sufficient cause of business cycles.

"Anyway, this type of asset price bubble boom is most decidedly not explained by the classic ABCT (which fails to consider the destabilising role of asset price inflation). Minsky's FIH is clearly a superior theory."

This is 110% correct. The ABCT is just Wicksell taken too literally. (And its pretty much the same as New Keynesian theories that are emerging right now). The problem is that it doesn't really EXPLAIN anything.

Asset price bubbles have no strict link to a certain level of interest rates. There are plenty of times in history when interest rates have been low and no asset bubbles inflated. See, for example, the 1950s:

1)Doesn't matter who explains the boom better.2)Naw, one could keep money or valuables in a safe deposit box? No one is stuck with FRB. The fraud is loaning something that is not yours. Everybody is fine with it until the owner comes looking for his property.3)Not just any cycle, business cycles. The type where a bust follows capital malinvestment brought on by entrepreneurial mistakes in interpreting time preference. Not weather fluctuations.Neil-Insurance causes consumers of banking services to not care much about the solvency of the bank they choose removing much need for it to actually be.Philip-So people didn't buy homes because interest rates were low? Maybe just bigger homes?Businesses don't seem more plausible when interest rates are 1% rather than 10% if a loan must be obtained to start the business?

I don't even know what you're talking about here. Interest rates were rock-bottom, but an asset-bubble/inflation didn't form. There are plenty of instances of this in the post-war era across the developed world (the UK etc.). Go look at a pile of statistics and see if your interpretation actually fits the facts. Why do no Austrians do this? Oh wait, I know the answer to that question...

"Businesses don't seem more plausible when interest rates are 1% rather than 10% if a loan must be obtained to start the business?"

Yeah. But its more complicated than your Austrian fairy tale. There is no strict correlation between savings rates, prices and interest rates. The natural rate of interest is a phantom and your theory has no real explanatory value. Its just a story, a fairytale that buttresses your ideology. Like a passage out of the Bible that a Christian Fundamentalist looks to for moral and ethical guidance.

Jan: "This is 110% correct. The ABCT is just Wicksell taken too literally."Absolutly correct! Knut Wicksell himself,did not use the Natural Rate concept as anything else then a though model,to elaborate with,in an attempt to understand the changes to disequlibrium in a endogen money economy,not to be used slavish.He even more or less rejected it late in life.This is not new.It is pretty much written about this in Swedish by Wicksell himself and by his followers in Stockholm School, Erik Lindahl,Erik Lundberg, Bertil Ohlin and Gunnar Myrdal etc.They came to almost identical conclusions as Keynes by using Wicksell as starting point,and on the other hand the Austrians that only read Wicksell´s 1898 work, Interest and Prices in a narrow way ended up as sect.It so to say to way use a model.

"In the extreme case in which the expected rise in prices is each time fully discounted, the annual rise in prices will be indefinitely great.We have already pointed out that our picture does not correspond to reality." (Knut Wicksell, 'Interest and Prices', P. 148)

"Wicksell did not insist that cumulative processes necessarily must terminate in crises of hyperinflation or deflation; nor did he exclude the possibility they may set in motion forces that eventually generate a new equilibrium without crisis." (John Cunningham Wood, 'Knut Wicksell: Critical Assessments, P. 95)

This is pretty much identical to the New Keynesian theories that include a weak version of endogenous money in the form of a flat LM-curve set in line with a Taylor Rule target.

They are the proper heirs to Wicksell and their models are used in central banks today -- stupidly, in my opinion. The Austrians, on the other hand, because they're generally less clever than the New Keynesians, take the Wicksell model completely literally. Its rather amusing.

Jan: Thank you Lord Keynes and thank you Philip!Yes when in comes to Knut Wicksell it always becomes very complicated,since there is so much more in his work then the natural rate that point in all sorts of directions (some even to Post-keynsianism and even to MMT!). He was much of renaissance man old Knut.But i think, maybee his most important contributs is his pioneering work in the area of analysis of aggregate demand and aggregate supply that opened up for a lot others to think un-ortodox and in new directions, among them Keynes and Kalecki and lot others.For exampel, Gunnar Myrdal and Nicholas Kaldors in their common work on a "Circular Cumulative Causation", a pragmatic fruithful, approach to economic methodology,was directly inspired by Wicksell.The Natural Rate as "literally" idea was as fare as i know rejected ,allready by his own adepts in Sweden ,and even by Wicksell himself as a dead thread,so,i have hard to grasp how this today could inspire the Neo-Classical or Neo-Austrian etc, monetary theorists more then losely.And yes, the Flat LM-curve New Keynsians could probarly legitimize Taylor Rule targets by spin on the,natural rate concept by makin small adjustment. But Wicksell himself,as advisor to Swedish goverment was at least no simple inflation targeting hawk.I recommend the Austrian and other Neo-liberals of various flavor,if their interested about Wicksell, to also read his 1896, "Studies in the theory of Public Finance",there he call for goverment intervention,income redistribution,a public goods welfare state,utilisation of progressive taxation of personal and corporate income, and property inheritance tax etc.Or why not his even more radical: "Our taxes, who pay them, and who should pay? Comments and suggestions 1894" (Våra skatter, Hvilka betala dem, och hvilka borde betala? Synpunkter och förslag " 1894) I can´t understand why those von Mises, von Hayek or a Rothbard other Neoliberals celebrate such a radical??

His speech with the title "Down with the throne, altar, sword and money bag" 2 november 1908, even rendered the old professor 2 months in Ystad prison for breaking law "By loading or thwart God's Holy Word ... and provide general offense". I think both the Austrians and the flat LM-curve "New-Keynsians" etc. should be more careful with their company.There is a lot more, dynamite in Wicksell´s writing then hisnatural rate,infact in opposition to neo-classical dogma andneoliberalism.For exampel here is what he writes about the Walrasian Marginalism:

“the harmony economists, who endeavoured to extend the doctrine so that it might become a defence of the existing distribution of wealth” Lectures (1901) p. 39). and further about what he saw as their useless models to defend markets properties,it was: "almost tragic that Walras … imagined that he had found the rigorous proof … merely because he clothed in mathematical formula the very arguments which he considered insufficient when they were expressed in ordinary language." Lectures (1901) p. 73) He was a radical that stood the Socialdemocrats close, a personal friend and inspirator to many of their leading figures,but was no member.Tage Erlander theSwedish Prime minister remember Wicksell´s 1926 words to the Socialdemocratic Organisation in Lund,there he expressed his apprecitation for the honor but added that: "I do not belong to the herd,i am a sheep all by my self!"